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Taxing the Digital Economy – Recent Development Yong Sing Yuan 1 Date of Presentation: 11-11-2019
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Taxing the Digital Economy – Recent Development

Yong Sing Yuan

1Date of Presentation: 11-11-2019

BEPS Project

2

Base erosion and profit shifting (BEPS) refers to tax planning strategies used byMNEs that exploit gaps and mismatches in tax rules to artificially shift profitsto low or no-tax locations where there is little or no economic activity

2013: OECD and G20 adopted a 15-point Action Plan to address BEPS To ensure that profits are taxed where economic activities take place and value

is created

To restore confidence in the international tax system

2015: A package of measures to address BEPS was delivered

• An Inclusive Framework of 130+ countries and jurisdictions are collaboratingon the implementation of the BEPS package.

3

The tax challenges of the digitalisation of the economy was identified as one of the main areas of focus of the OECD/G20 BEPS Project

The BEPS Action 1 – 2015 Final Report (the “Report”) found that the whole economy was digitalising and, as a result, it would be difficult, if not impossible, to ring-fence the digital economy

Tax Challenges of the Digitalisation of the Economy

440th CATA

Annual Technical Conference 2019

Tax Challenges of the Digitalisation of the Economy

Emergence of new and highly digitalised business models

Companies deliver goods and services in novel manners

Goods and services transacted online and supplied from offshore Value created in a jurisdiction But consumption takes place in another

How should tax principles and rules be applied?

The genesis of events

5

BEPS Action 1 Report recognised that digitalisation

and certain business models presented

challenges for international

taxation

G20 Finance Ministers

mandated OECD’s Inclusive

Framework to deliver an interim

report by April 2018 and a final report in 2020

Interim Report set forth review of profit allocation

and nexus rules to work towards

consensus-based solution

Policy Note and public

consultation document

outlined proposals involving two

Pillars which could form the basis for

consensus

OECD’s Inclusive Framework agreed on a Programme

of Work to develop a

consensus-based long-term solution

End 2020Long-term

consensus-

based solution

2015

2017

2018

Early 2019

May 2019

Annex A

Public consultation documents detailing

the two Pillars released; Public

consultation meetings for each Pillar to be held at

the OECD

End 2019

Outline of the architecture of the

international tax changes to be agreed by the

Inclusive Framework

Jan 2020

640th CATA

Annual Technical Conference 2019

Tax Challenges of the Digitalisation of the Economy

OECD TFDE interim Report on tax challenges of highly digitised business models Scale without mass Heavy reliance on intangibles Data and user participation

Two fundamental concepts in international income tax system examined Profit allocation Nexus rules

740th CATA

Annual Technical Conference 2019

Tax Challenges of the Digitalisation of the Economy

The Programme of Work provides for two pillars to be explored. Discussions are still ongoing

Pillars One and Two

Pillar One

• Relooks the allocation of taxing rights

• New profit allocation rules

• New nexus rules

Pillar Two

• Aims to address the remaining BEPS issues

• Provide jurisdictions with a right to “tax back”, where other jurisdictions do not tax or subject an income to low tax

Allocates more profits (taxing rights) to market jurisdictions

Sets a floor to tax competition by limiting tax rates

Pillar One

940th CATA

Annual Technical Conference 2019

Scope

• Consumer-facing businesses with carve-outs

New Nexus

• Not dependent on physical presence

• Largely based on sales

New Profit Allocation Rule going beyond the Arm’s Length principle

• Largely retain current transfer pricing rules

• Complements with formula based solutions

Increased Tax Certainty via Three Tier Mechanism

• Amounts A, B and C

Pillar One

10

To allocate more taxing rights to the market jurisdictions through a Three-tier mechanism

Annex B

A share of deemed residual profit allocated to market jurisdictions using a formulaic approach (new taxing right)

A fixed remuneration for routine marketing and distribution functions in the market jurisdictions

Remuneration for additional functions in the market jurisdictions

A

B

C

Pillar Two

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Parent jurisdiction can tax the income of the entity’s foreign branches and subsidiaries

• “Top up” tax in the parent jurisdiction

Jurisdiction of payer can deny deduction for payments made to related parties

• “Top up” tax in the payer’s jurisdiction

Jurisdiction of payer can deny treaty benefits (e.g. reduced withholding tax rate)

• “Top up” tax in the payer’sjurisdiction

Income not subject to a

minimum tax rate

Income inclusion rule

Subject to tax rule

Undertaxed payment rule

Global Anti-base Erosion Proposal (GloBE)

Not yet determined

Rules will be ordered to avoid double taxation.

Annex C

Singapore’s perspective

• Singapore participates in OECD’s Inclusive Framework on BEPS, Task Force on the Digital Economy and the relevant Working Parties.

• Singapore is a member of the OECD’s Inclusive Framework Steering Group.

Singapore supports the work led by the OECD in developing a consensus-based solution

Singapore is committed to work with members of the BEPS Inclusive framework towards a consensus-based solution on a without prejudice basis

It is important that the solution is anchored on sound economic principles

Singapore’s perspective

Singapore advocates the following principles:

Support global economic growth and innovation

Maintain the level playing field for all economies, large or small, developed or developing

Recognise the unique social and economic circumstances of jurisdictions

Singapore’s perspective

International consensus

Singapore supports jurisdictions working together at international fora to achieve consensus

Avoid unilateral actions, which may inadvertently lead to over-taxation

Avoid hindering trade, creating uncertainties, adding costs to business

Ultimately, consumers will bear the additional cost

Singapore’s perspective

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